Squeeze on household budgets to remain unchanged as recent falls in inflation come to a halt

The average rate of inflation for UK consumers will drop no further for the moment, as petrol price hikes put an end to the recent easing of the squeeze on family finances.

The headline consumer prices index rate of inflation for July is expected to remain unchanged from June at 2.4 per cent, as lower food prices are offset by the petrol rises and fewer discounts from retailers.

A CPI figure of 2.4 per cent would still be its lowest level since November 2009, as inflation continues to fall from its peak of 5.2 per cent in September, with the UK economy flatlining.

Food prices are coming down but petrol prices are on their way back up

The retail prices index measure meanwhile is expected to come in at 2.8 per cent, and that will attract most attention because of its implications for beleaguered rail commuters.

RPI is used to determine the following January's annual rise for regulated rail fares including season and saver tickets.

The average fare increase is calculated by adding 3 per cent to RPI, meaning an average increase of nearly 6 per cent, while some fares can go up by a further five percentage points as long as they are balanced by cuts on other tickets.

CPI inflation fell from 2.8 per cent in May to 2.4 per cent in June as retailers put on fewer discounts than in June when the wet weather left them desperate to shift stock. Petrol prices have also started creeping higher.

Sir Mervyn King predicts that inflation will stay around 2 per cent 'for some time'

However, CPI is expected to set to continue falling back towards its 2 per cent target later this year.

It is hoped that this will give a much-needed boost to squeezed consumers, who have reined in spending since the financial crisis.

UK households have been squeezed by
years of low or non-existent pay rises while prices for goods and
services have climbed at rates of 4-5 per cent.

But there was good news on family finances last week, when an influential index showed take-home wages for workers in the private sector rising faster than inflation for the first time in nearly four years.

The VocaLink FTSE 350 Take Home Pay Index rose to 3.1 per cent during the three months to July, up from 2.7 per cent in June.

And Sir Mervyn King last week said that the squeeze on family finances was finally 'coming to an end' as the cost of living falls.

Presenting the Bank of England's quarterly inflation report, he said inflation will continue to drop and that CPI is ‘more likely than not to be around or a little below target [2 per cent]’ for some time.

But there have recently been some worrying signs that inflation may not fall as quickly as hoped.

The world oil price is back up to levels not seen since early May, in a blow to British motorists hoping for further petrol price relief later this year.

Brent crude rose to $115 a barrel today, the highest in more than three months, as concerns emerged that North Sea supply could fall just as western governments are thinking of rolling out more stimulus measures.

A severe drought has ravaged much of the US corn crop, which is set to push up prices of grains and meat, while continuing tensions in the Middle East mean oil prices may rise again.

And in the UK, sharp increases in university tuition fees are also set to further push up the cost of living.

Deflated: Rampant price rises have fallen away and the Bank now believes inflation will fall below target in the coming years.

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Squeeze on household budgets to remain unchanged as recent falls in inflation pause